BlackBerry shares fell as much as 18 percent after Fairfax abandoned the takeover plan, opting instead for a bond deal and management shakeup. Fairfax, BlackBerry’s largest investor, will invest $250 million in the convertible debentures, according to a statement today. CEO Thorsten Heins will step down, while former Sybase Inc. chief John Chen becomes executive chairman, putting him in charge of the company’s strategy.

The transaction, slated to be completed later this month, follows a six-week attempt by Fairfax to attract financing for its buyout bid, which would have taken the smartphone maker private. The $1 billion infusion will help stabilize the unprofitable company as it burns cash, though BlackBerry will still pursue other deals and is now more open to the idea of a breakup, people familiar with the matter said.

“The important thing is, what is the strategy?” said James Moorman, an analyst with S&P Capital IQ in New York. “They have a chance, and they have a little more runway with the additional cash, but they need to start making some smart decisions.”

Stock Drops

BlackBerry shares fell as low as $6.40 in New York, sending the company’s market value below $3.5 billion. The stock was already down 35 percent this year before today’s tumble, as the company’s smartphones lost ground to Apple Inc. and Samsung Electronics Co.

Chen will become interim CEO while Waterloo, Ontario-based BlackBerry seeks a permanent replacement. The 58-year-old previously executed a comeback plan at Sybase, which was acquired by SAP AG for $5.8 billion in 2010.

The move to raise funds from convertible debentures, which can be turned into stock, underscores BlackBerry’s deteriorating cash situation. The company’s cash and short-term investments fell by almost $500 million last quarter to $2.3 billion. At that rate, the money will be gone by the end of next year. And further restructuring will only make the funds go faster, said Alexander Peterc, an analyst with Exane BNP Paribas.

BlackBerry’s latest phones got a tepid response from consumers, and even once-loyal customers such as large banks are putting off upgrading to the new software. Jabil Circuit Inc., one of BlackBerry’s top electronics suppliers, said in September that it will probably disengage from its relationship with the company in coming months. That’s raised speculation that BlackBerry will stop making phones altogether.

‘Structural Decline’

If the company stops making phones, it could focus on its enterprise business, which manages fleets of e-mail servers for corporate and government customers. Without its own devices to worry about, BlackBerry would be able to support all different models equitably. Still, shrinking demand for BlackBerry phones is going to take a toll on services revenue, said Anil Doradla, a Chicago-based analyst at William Blair & Co.

“The service business, which is very tied to the handset business, could rapidly shrink in the near term,” he said.

In a breakup scenario, the enterprise business may be worth as much as $1.1 billion, according to Raymond James Financial Inc. BlackBerry’s patents also may have value on their own. The intellectual property could fetch $1.6 billion to $3 billion, according to analysts’ estimates. Still, the lack of interest among bidders suggests that the patent value may be lower, said Michael Genovese, an analyst at MKM Partners LLC.

Not Worth It

Fairfax, a Toronto-based investment firm, had until 5 p.m. today to come forward with a more definitive offer for the Canadian smartphone maker, following a preliminary takeover proposal it made six weeks ago. The company had been struggling to attract the financing for the deal, according to people familiar with the deliberations. It also never named any other members of its takeover coalition.

Cerberus Capital Management LP, the New York-based firm that specializes in investing in distressed assets, also had been seen as a potential bidder. Cerberus has been discussing a joint offer with BlackBerry co-founders Mike Lazaridis and Doug Fregin and chipmaker Qualcomm Inc. (QCOM), two people with knowledge of the matter said last week.

Goldman Sachs

Lazaridis, the inventor of the BlackBerry and former co-CEO of the company, said in October that he hired Goldman Sachs Group Inc. to help him explore a deal with Fregin, who used to run the company’s operations. The two men together own about 8 percent of BlackBerry’s shares.

Lenovo Group Ltd., based in Beijing, has expressed interest in BlackBerry too -- though a Chinese bid would face scrutiny from Canadian and U.S. regulators. Canadian Prime Minister Stephen Harper said last month that BlackBerry should be wary of any takeover offer that raises national-security concerns.

Without a concrete bid in the offing, investors are now left with a less attractive future, Moorman said.

“This is a little disturbing given all the talk of interested bidders,” he said. “I’ve always thought going private would be the right step for them.”

BlackBerry kicked off the bidding process in August when it said it would consider selling the company as part of a strategic review. At the time, Fairfax CEO Prem Watsa left the smartphone maker’s board so he could pursue a deal. He will now be rejoining BlackBerry as lead director.

Going Private

Watsa said in a September interview that taking BlackBerry private would give the company the chance to reorganize outside of the glare of analysts and the media. He gave little indication of how the turnaround would work, though.

Fairfax, which has a portfolio worth about $24 billion, owns stakes in industries ranging from Irish banking to Canadian cattle feed. The firm has made contrarian investments, including a profitable bet against the U.S. housing market, and is now wagering on Greece’s recovery. Watsa recently spent $164 million euros ($222 million) to more than double his investment in Athens-based Eurobank Properties Real Estate Investment Co.

BlackBerry faces long odds in the smartphone industry. The company has been losing market share for years after being slow to add the kind of features and applications offered by Apple.

Doors Closing

“Looks like doors are closing on BlackBerry, and they are going to be looking at fewer options,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago, who helps manage $66 billion in assets. “Another company may want to get a jump into the handheld device business. Besides that, I would say a last-ditch measure would be to sell intellectual property and patents.”

The company put itself on the block after the new BlackBerry 10 operating system failed to compete with the iPhone and devices powered by Google Inc.’s Android software. Today’s move marks the conclusion of BlackBerry’s strategic review. As part of the changes, Heins and David Kerr will step down as directors. Barbara Stymiest, the company’s current chairman, will remain on the board as the head of the audit and risk-management committee.

“The BlackBerry board conducted a thorough review of strategic alternatives and pursued the course of action that it concluded is in the best interests of BlackBerry and its constituents, including its shareholders,” Stymiest said in the statement. “This financing provides an immediate cash injection on terms favorable to BlackBerry, enhancing our substantial cash position.”